Checking In: Time to FILL Up? (FILL, XLE, IXC)
Following Wednesday's rally, stocks and equity-based ETFs suddenly look alluring, but when it comes to the energy sector, the Wednesday pop may amount to nothing more than fool's gold. Oil futures eked out small gains on Tuesday and Wednesday, but those meager gains haven't done much to put a dent in the almost 20% West Texas Intermediate futures have plunged since the start of May.
Said differently, it's going to take a lot more confirmation before investors feel safe with the likes of the Energy Select Sector SPDR (NYSE: XLE) again. XLE, which allocates roughly 35% of its weight to Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), is focused primarily on U.S.-based energy producers.
All that factoid means is that XLE has been a little less bad recently compared to internationally-focused energy funds. With U.S. oil demand slack at the moment and Europe's sovereign debt crisis pressuring demand across the Atlantic, it's not unreasonable to say the near-term outlook isn't too rosy for oil equities and the relevant ETFs.
On the other hand, it must be noted that demand will continue to outpace supply in the coming years and to that end, there is a new ETF with global exposure investors may want to have a look at: The iShares MSCI Global Energy Producers Fund (NYSE: FILL). When FILL debuted earlier this year, we argued the fund looked a lot like the iShares S&P Global Energy Sector Index Fund (NYSE: IXC) and a little bit like the SPDR S&P International Energy Sector ETF (NYSE: IPW).
For example, Exxon, Chevron, Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP) and Total (NYSE: TOT) represent about 41% of IXC's weight. That same quintet combine for roughly 42% of FILL's weight. Home to 200 stocks, FILL is larger in terms of holdings than IXC and IPW and cheaper than both with an expense ratio of 0.39%.
FILL shares another similarity with IXC and that is a large weight to the U.S. even though its name implies a more global posture. Overall, 45% of FILL's country weight is devoted to U.S. stocks while the U.K. and Canada combine for over 28%.
In the current market environment, one of FILL's pluses is that it offers relatively low emerging markets exposure as Brazil, China and Russia combine for just 10% of the fund's weight and that means investors dodge excessive exposure to problematic Petrobras (NYSE: PBR) of Brazil.
Regarding valuation, FILL sports a price/earnings ratio of 13.1 and trades for just under two times book the weighted average book value of its components. IXC's P/E is 13.7 and that ETF trades at 2.1 times book value. Both compare favorably with the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE), which sports a P/E of 15.2 and trades at 2.5 times book value.
Beyond the obvious hurdle of near-term weakness in oil prices and demand, the other critical issue that must be acknowledged with FILL and comparable ETFs, is the ability of companies such as Exxon, Shell and BP to do two things. First, increase oil output with sacrificing profit margins, something investors are clamoring for with these companies, especially after first-quarter oil and liquids production failed to impress. Second, with integrated firms dominating FILL's lineup, it is essential these companies find a way to boost the profitability of their downstream operations. Either that or pull a ConocoPhillips (NYSE: COP) and get out of the refining business altogether.
For now, wait for a rally led by high-beta fare to be reborn and confirm itself before FILL-ing up.
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